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DENVER — A federal jury acquitted three former Qwest executives of improperly booking nearly $34 million in revenue, a stinging defeat for the government in the first criminal trial stemming from accounting irregularities at the telecommunications giant.

The jury deadlocked in the case against a fourth defendant, leaving prosecutors the choice of retrying the high-profile case. Assistant U.S. Attorney William Leone said that decision would be made within two weeks.

“It won’t have any effect on the remainder of our investigation,” he said. “It’s a mistake to place too much importance on any single case.”

Thomas Hall, Grant Graham, John Walker and Bryan Treadway were accused of improperly booking nearly $34 million in revenue as part of a $100 million deal in 2001 to link Arizona schools to the Internet.

Prosecutors say the four conspired to declare the revenue before the purchases were made and then lied to accountants and investigators about what they had done.

Defense attorneys said the men were scapegoats, sacrificed by higher-ups eager to boost revenue, and that they were led to believe the deal was legitimate by accountants and company officials.

“They lumped me in,” said Walker, who was cleared of all charges. “The FBI and U.S. Attorney’s Office never spoke to me before they indicted me.”

Treadway, who also was acquitted, declined to comment. Defense attorney Stephen Cowen said: “Mr. Treadway and his family are grateful that this jury has totally exonerated him. We’ve said all along these charges were baseless.”

The verdict is the first to come out of investigations that prompted Qwest chief executive Joseph Nacchio to quit in 2002 and ultimately led the Denver-based company to erase $2.5 billion in revenue. Qwest provides telephone services in 14 states in the West and Midwest.
All four men had faced 11 charges, including fraud and conspiracy. A conviction could have meant decades in prison.

Graham, a former chief financial officer of the global business unit, was acquitted of three charges and a mistrial was declared after the jury failed to agree on eight remaining charges.
The judge also declared a mistrial in the case against Hall, a former senior vice president. The jury failed to agree on any counts against him.

During deliberations, the jury had asked the judge for guidance on what constituted criminal intent. It said Friday it could not go any further.

The defendants and four other former Qwest executives also have been sued by the SEC, which says they inflated revenues by about $144 million in 2000 and 2001 to meet promises of double-digit revenue growth. That lawsuit was put on hold until the criminal trial was over. The company also faces several shareholder lawsuits and about $17 billion of debt.

According to testimony in the case, Qwest reported the revenue from a sale of computer equipment to the Arizona School Facilities Board, which didn’t pay for any of it until six months later.

In a scramble to meet revenue targets, prosecutors said, the defendants cajoled Cisco Systems Inc. into sending whatever equipment it had to a Phoenix warehouse by June 30, 2001, the end of the quarter. Some of the equipment was not even the right type, witnesses said.

Graham had assigned accountants Jim Kurtz and Doug Hutchins to find a way to make the transaction fit into accounting rules in a way that would allow Qwest to report the revenue. Prosecutors said Hutchins, with help from the defendants, “ginned up” details of the transaction.

Hutchins testified that Graham, who was his boss, pressed him to try to push the Arizona schools deal through. He said he felt the deal pushed the limits of proper accounting, but was not illegal.

That changed, he testified, when Graham told him to bypass auditors on a key document in the deal. He said he was shocked by the demand and the next day threatened to quit if Graham didn’t tell auditors about the documents.

Graham’s attorney, Dan Sears, said prosecutors needed to find scapegoats to show they were fighting corporate misdeeds.

“These four gentlemen didn’t bilk Qwest of millions of dollars,” Sears said during closing arguments. “Call it misguided, call it exuberant, but don’t call it criminal.”

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